Foundation Petitions Tax Court for Declaration on Exempt Status

AEGIS FOR DREAMS FOUNDATION,
Matthew W. Ryan, Trustee
petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
respondent

UNITED STATES TAX COURT

PETITION FOR DECLARATORY JUDGMENT

(EXEMPT ORGANIZATION)

1. Petitioner's name is Aegis for Dreams Foundation. Petitioner's principal place of business is 159 Woodlawn Avenue, Saratoga Springs, New York 12866.

2. Petitioner mailed its request for determination to Internal Revenue Service at its office located at 201 West Rivercenter Boulevard, Covington, Kentucky 41011 on December 23, 2019.

3. Petitioner is an exempt organization (public charity) formed under Section 501(c)(3) of the Internal Revenue Code (the "Code").

4. Petitioner has exhausted its administrative remedies within the Internal Revenue Service.

5. Respondent issued a notice of determination dated August 10, 2021, a copy of which is appended to this filing.

6. Respondent's determination is erroneous for the reasons set forth in paragraphs 7, 8, 9 and 10. below and the lettered subparagraphs thereunder, as supported by the facts and legal authority set forth herein and in the administrative record.

7. Petitioner operates exclusively for educational and charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code (hereinafter "Code").

A. Petitioner holds an exclusive license to produce, exhibit and ultimately own the film "Aegis for Dreams" (hereinafter the Aegis Film"). The Aegis Film is a Revolutionary War story set forth in the historical feature film screenplay¹ of the same name ("the Aegis Screenplay")².

B. Petitioner's sole operational activity is to finance (through charitable contributions), produce and exhibit the Aegis Film in furtherance of its educational purpose.

C. Because Petitioner's exhibition of Aegis Film in theaters and through other media will directly further Petitioner's educational purpose, Respondent erred in concluding that exhibiting in the same manner as other feature films disqualifies Petitioner for exemption³

D. In applying the recognized factors under the operational test⁴, none of which alone is dispositive, Respondent has failed to point to some non-exempt purpose arising from Petitioner's planned activities, or even synthesize these recognized factors. Respondent disregards the fact that each time a member of the public views the Aegis Film, Petitioner's educational purpose is advanced, and for every dollar of revenue that Petitioner collects, approximately another dollar will — in a finite, relatively short period of time⁵, be mandatorily paid to Youth Charities and Soldier Charities, advancing Petitioner's second exempt purpose (its charitable purpose).⁶

E. Respondent's position that commercial activity is nonexempt activity (and the authorities it cites) is misaligned with the facts of this case: here, net profits derived from one exempt activity will soon be distributed to serve the other exempt activity. Unlike the authority cited, the operational dynamic of "produce, exhibit then donate" has a short and finite life span.⁷

F. The administrative record makes clear that a historically accurate feature film about the American Revolution has not been pursued within the for-profit commercial film industry for approximately fifty years.

G. Petitioner does not "compete" within the for-profit commercial industry based on the plain meaning of that word, which is "to try to be more successful or better than someone else who is trying to do the same as you". In Petitioner's pursuit of the Aegis Film, historical accuracy (and thus educational value) is paramount; this purpose is diametrically opposite to the creative/financial conflict paradigm in the commercial film industry. Thomas Rothman, Chairman of SONY Pictures Motion Pictures Group, crystallized this continual conflict paradigm, stating in 2020:

"For those of us in the theatrical business, every creative decision is a financial decision, every financial decision is a creative decision and you have to marry those two things, right, so we can't make movies independent of the potential return on that movie."⁸

In short, in the for-profit commercial film industry, a film that breaks even would be clinically viewed as a defeat: a waste of precious time and financial resources. If Petitioner were to break even with Aegis for Dreams, while not an optimal result due to Petitioner's desire to contribute fund to charities, it would nonetheless be a significant accomplishment because this important national story would now be captured on film for viewing in perpetuity.

H. The collaboration by the National Parks Service and famed feature film director John Huston on the 1976 short film "Independence", about America's Founding Era, and the circumstances surrounding the need to make the film and the manner in which it was underscores the lengths to which we as a country have been required to go to produce even a non-feature length film of this genre. This is strong evidence that (i) Petitioner is not in competition with for-profit commercial film entities and (ii) a film in this specific genre is a severely unmet community need.

I. Respondent erred in not recognizing as "non-competitive" (with regard to for-profit commercial firms) the weighty obligations placed upon Petitioner to use a "Qualified Production Company" and to pursue an exclusive extended theatrical release⁹. From a commercial perspective, these requirements are shackles that would be eschewed by for-profit commercial film investors due to the potential detrimental effect on profitability.

J. Respondent's assertion in its letter of 7/27/2021 that exhibiting a film in the same manner as the for-profit commercial film industry is per se "compet[ition] with other films, regardless of their content", is erroneous.

K. As the administrative record makes clear, Petitioner is bound by the terms of the License to pursue an exclusive extended theatrical release not to maximize profit, but rather realize the "Donor's firm belief that the [Aegis] Film should be viewed by the citizenry in a communal setting"¹⁰. Any material provision that disregards the profit motive is evidence of non-commercial behavior.

L. Respondent erred in not adequately considering two factors under the operational test that weigh considerably in favor of a conclusion that Petitioner is not operating in a commercial manner: (1) Petitioner must finance the Aegis Film primarily through charitable contributions¹¹ (versus profits from its operations or outside investment) and Petitioner must, relatively soon after the Aegis Film is exhibited, distribute a substantial amount of its assets to youth and soldier charities.

M. Any feature film is a highly speculative venture. In a normal commercial context, this high inherent risk prompts significant financial scrutiny as to the prospects that the film will be profitable, whereas contributors to Petitioner have one goal: that the Aegis Film be disseminated to the public, completely independent of any concerns of profit.

N. To gain access to the traditional feature film exhibition, there are associated expenditures, such as advertising, that will likely be required as a condition of that access. While Petitioner may not be in a position to demand that certain prerequisites be carried out and others not, the use of such services such as advertising cannot be seen to per se render an organization to be unduly using commercial methods.

O. Respondent erred in asserting that Petitioner's pricing policy militates toward denying Petitioner's request for exemption. Under the terms of the License, Petitioner is (i) required to use its best efforts to facilitate viewing of the Aegis Film in high schools in the United States; and (ii) encouraged but not required to exhibit the Aegis Film in theaters and open-air venues in the United States on or around the Fourth of July holiday, in perpetuity — in both cases "at a discounted (or preferably no) fee."¹² Because at this time the Aegis Film project is in its infancy (and at a standstill in light of Respondent's denial of Petitioner's exemption), with no agreements for the production and distribution in place, Petitioner cannot in any meaningful way outline the terms of any theatrical release pricing policies. It is not certain that Petitioner will be in a position to control theatrical viewing pricing. However — unlike (commercial) theatrical releases — because any net profits resulting from the exhibition of the Aegis Film will ultimately be distributed to charities — all of the factors which Petitioner will be a in position to control (post-theatrical release) support and to not impair the case for exemption. Moreover, if the Aegis Film is made, the time-span for viewing this film will be measured not in weeks¹³ but in decades, long after the popcorn is swept from the theater floor at the conclusion of its initial theatrical release.

8. Petitioner's operations do not more than incidentally benefit the private interests of its founder and officer.

A. Petitioner's pursuit of the Aegis Film highlights the stark contrast between two worlds: the profit-driven commercial film industry — for decades a barren wasteland for such historically accurate Revolutionary War era stories — versus a charitable vehicle, where hope exists that charitable funds will gravitate to this pursuit. Respondent's assertions that an undue "private benefit" will inure to the Founder if the License expires and the Aegis Screenplay is returned to him, placing this film project back in the profit-driven world, ignores this longstanding market reality for films of this type in the for-profit commercial film industry.

B. Respondent's assertion that the Donor will unduly gain from Petitioner's production of the Aegis Film is without merit. Respondent asserts in its 7/27/2021 letter:

"[the Founder] will receive the benefit of having an organization receiving charitable donations personally by creating a film from his screenplay [is an undue private benefit] (citing Christian Manner International, Inc. v. Commissioner of Internal Revenue, 71 T.C. 661 (1979).

This argument ignores the reality that whenever intellectual property is donated to charity by its creator and such property is used for productive purposes, the result will inevitably reflect favorably upon the creator. If Respondent's assertion were correct, then any intellectual property transfer to a charity with facts similar to Petitioner's would render the charity undeserving of exemption. Moreover, any claim by Respondent that Donor's reservation of any rights with respect to its intellectual property in this case in an undue private benefit to Donor is erroneous.

C. The administrative record makes abundantly clear that promotion of the Donor, as the creator of the Aegis Screenplay, plays no role in Petitioner's pursuit of the Aegis Film. In all of Petitioner's longstanding and extensive web presence (on a website, Facebook and Twitter¹⁴) promoting this project, the Donor's name is not, nor ever has been, set forth in any of this content — not even once.

D. Respondent's seeming assertion that the Donor's ability to control Petitioner's trustee slate militates against exemption¹⁵ fails to consider the following points:

First, in order for Petitioner to satisfy the terms of the License, it must meet the weighty dual and interdependent requirements of: (i) raising thirty million dollars in conditional charitable pledges; and (ii) secure a production agreement with a Qualified Production Company — by definition an experienced, professional production company. In light of the material financial commitments required of  all of these parties, they will undoubtedly demand that Petitioner assemble a professional, experienced multi-person governance team to oversee Petitioner's operations as a condition of such financial commitments.

Second, Petitioner will seek grants from institutions and foundations¹⁶ who are run by professionals (and in the case of charitable foundations, fiduciaries) bound to exercise great care in disbursing funds.

Third, Petitioner's independent distribution committee chaired by a former senior official of the United States Government (and/or their appointees/delegees) is a strong indication that a high level of financial oversight and transparency will be brought to bear in all of Petitioner's dealings, including its internal operations.

Fourth, the Donor for the last twenty-five years has both served as a professional trustee in his employment with a global banking institution and represented trustees in his legal practice and is both experienced and highly sensitive to the fiduciary duty he owes to Petitioner.

Fifth, While the educational sufficiency of the Aegis Screenplay to qualify Petitioner for exemption is not at issue (nor is its historical accuracy), the obtaining of Federal copyright status, the endorsements of prominent historians and favorable analyses from both human (The Black List) and artificial sources (film industry artificial intelligence firm ScriptBook) on the Aegis Screenplay, when taken together, is strong evidence of both the legitimacy of this endeavor and the seriousness of Petitioner's purpose.

Sixth, the time devoted by persons who might formally serve as a co-trustee of Petitioner (not to mention the attendant responsibility) is as precious as the charitable funds Petitioner seeks to attract. As it awaits tax-exempt status, Petitioner is now, as it has been since its inception, a dormant, "one-person" operation holding a single asset (the License).

9. Petitioner is neither organized nor operated for the primary purpose of carrying on an unrelated trade or business.

A. Respondent's conclusions that Petitioner was organized and operated to conduct activities unrelated to an exempt purpose of Petitioner is contradicted by the facts set forth in the administrative record.

B. Assuming, arguendo, that Petitioner's organizational and operational activities are unrelated to a stated exempt purpose of Petitioner, Respondent's conclusion that Petitioner was organized and operated primarily for that purpose is contradicted by the facts set forth in the administrative record.

C. Petitioner's planned activities do not constitute an unrelated trade or business.

D. Assuming, arguendo, Respondent's "unrelated trade or business" classification is found to be correct, this assertion does not support denial of Petitioner's request for exemption.

E. Petitioner's planned production and exhibition of the Aegis Film will not be "regularly carried on" within the meaning of the Unrelated Business tax (Code section 513).

10. Respondent's adjudication under this highly the unique set of facts violates The Equal Protection Clause contained in the Fourteenth Amendment to the U.S. Constitution and is arbitrary and capricious.

A. Respondent's denial of Petitioner's request for exemption cannot be reconciled with its treatment of similarly situated applicants, as more fully set forth in Petitioner's written submission to Respondent of 5/18/2021, which references weblinks to considerable information, all of which is part of the administrative record.

B. If Respondent deems worthy of Code Section 501(c)(3) status the renowned entity Farm Aid, Inc., which generates a large portion of its revenue from concert performance revenues¹⁷, then the planned film exhibition activities of Petitioner — the very manifestation of its educational purpose — are, a fortiori, deserving of the same treatment.

11. STATEMENT OF FACTS:

The following facts are intended to provide background on Petitioner's activities. It is not intended to be an exhaustive recitation of the relevant facts contained in the administrative record, which is voluminous.

A. Matthew W. Ryan (the "Donor" or "Founder") is the sole author of the 129-page Aegis Screenplay (as previously defined), which tells the story of the relationship between George Washington and Alexander Hamilton during America's War for Independence.

B. Over a period of three years, the Donor undertook extensive research of source materials and traveled to many historical sites that loomed large in this story, including Yorktown (Virginia), Morristown (New Jersey), Valley Forge, Independence Hall and Saratoga (New York).

C. In 2016-17, the Donor secured Federal copyright protection over the Aegis Screenplay.

D. The Aegis Screenplay has a demonstrably very high level of historical accuracy. As set forth in the Donor's memorandum to the National Endowment for the Humanities dated December 27, 2017 (the "NEH Memo") of the approximately 15,000 spoken word count in the Aegis Script, about 6,600 words — or over 40 percent — are words actually spoken or written by the speaker in the story. The rest of the dialogue has a solid historical underpinning. A list of citations and historical locations referenced or depicted in the Aegis Screenplay is attached to the NEH Memo, contained in the administrative record.

E. The Donor is committed to telling this story to the American public in a historically accurate way, free from the financial influences of for-profit ventures that invariably put profit before all else.

F. In addition to the theatrical release of the Aegis Film, the Foundation will develop and distribute a teaching guide for the Aegis Film, for use in history curricula throughout high schools in the United States.

G. As a part of the Donor's commitment to historical accuracy, during the period from July 2017 to April 2019, the Donor secured written endorsements of the Aegis Screenplay from three nationally prominent Revolutionary War-era historians.

H. August 4, 2017: Dr. Denver Brunsman, Professor of Early American History, George Washington University and Mount Vernon lecturer (PhD Princeton) wrote to the Donor:

"I am very impressed with the screenplay. The dialogue and settings exude deep research and historical sensitivity. As the project progresses, I would be happy to join your list of endorsements."

I. On February 1, 2019, Dr. Edward Lengel, historian, former Head of the Washington Papers Project at the University of Virginia and author of three books on George Washington wrote to the Donor:

"You have done a wonderful job of setting out the story, and as Denver [Brunsman] told you, it is sensitively written. I kind of look at this as a story of the Revolution through the eyes of Hamilton/Washington and their mutual relationship, rather than a Hamilton retread. It's original and compelling."

J. On April 8, 2019, Dr. Steven Knott, Professor of National Security Affairs, The United States Naval War College and co-author of the 2019 book "Washington and Hamilton: The Alliance That Forged America", wrote to the Donor:

"I read your script from beginning to end. What a remarkable work! . . . You've captured the essence of the relationship between Hamilton and Washington in all its complexity. The way you unfold the story is very creative. I could see it on film in my mind. Bottom line: I truly enjoyed it, and learned from it."

K. On March 29, 2019, Dr. Knott wrote to the Donor:

"I cannot overstate how important your project is . . . The relationship between Washington and Hamilton was the most critical alliance in the history of our nation. I cannot see this nation coming into existence without the sacrifices of these two men. The fact that so much of their story remains unknown to so many of our fellow citizens is nothing short of tragic. When you bring this project to fruition you will be doing a remarkable service to history and to our country."

L. On July 22, 2018 the Donor established the Aegis Foundation pursuant to a written agreement.

M. On July 22, 2018, the Donor also gratuitously granted to the Foundation certain license rights to the Aegis Screenplay, as specifically set forth in a document titled "Donation of Exclusive Limited License" (the "License").

N. The primary charitable activity of the Foundation is to educate the American public on the virtuous leadership exhibited by General George Washington during America's War for Independence, to be accomplished primarily through the Foundation production, promotion and exhibition on a broad basis the historical feature film "Aegis for Dreams" (the "Aegis Film").

O. From July 22, 2018 to the present date, the Foundation's sole asset has been its rights under the License.

P. The original initial term of the License is a period of two years, ending on July 22, 2020. On June 3, 2020, the Donor extended the initial term of the License by two years, to July 22, 2022.

Q. Pursuant to the License, the Donor granted the Foundation the right to produce, promote, exhibit and thereafter own in perpetuity the resulting completed Aegis Film.

R. In order for the Foundation to make and subsequently own the Aegis Film in perpetuity, it must secure charitable pledges of at least thirty million dollars ($30,000,000) (the "Conditional Pledges"), all conditioned upon the Foundation entering into a production agreement with a "Qualified Production Company" (License Section 1.B).

S. The Foundation intends to secure the Conditional Pledges from U.S. non-operating foundations and U.S. Corporations which support the Foundation's mission of educating the American public about America's War for Independence and the greatness of George Washington.

T. The term "Qualified Production Company" is defined in the License as "a production company that has been the primary producer of at least two (2) Qualified Films." (License Sec.4).

U. The term "Qualified Film" is defined in the License as "(A) a Full-Length feature film of material historical accuracy: (B) having a budget of not less than Fifteen Million US Dollars (USD $15,000,000); and (C) exhibited at more than one hundred (100) theaters for a period of more than ten(10) consecutive weeks, measured from the date of wide release" (License Section 3.B.).

V. Donor stated in the License:

"I view the considerable requirements set forth under Section 1.B. (needed to secure an Extended Term) as crucial to realize my vision that a Completed Film produced under this License must be worthy of viewing on a widespread basis long into the future." (License Section 1.C.).

W. Although the term of the Foundation is perpetual, during an "Exclusive Benefit Period", defined as the period from the Inception Date to May 31, 2028, the Foundation's charitable distributions shall be made exclusively to Soldier Charities and Youth Charities (Foundation Agreement Article THIRD, subparagraph A. I).

X. Prior to May 31, 2028. any and all charitable distributions shall be directed by an independent three-person Charitable Distribution Committee (Foundation Agreement Article THIRD, subparagraph A.2).

Y. The Charitable Distribution Committee shall be chaired by the longest tenured former United States Secretary of Defense willing to serve (or his delegate), together with two persons selected by the Chairperson (Foundation Agreement Article THIRD, subparagraph A.2.a).

Z. In the year prior to May 31, 2028, it is a requirement that an amount between 80% and 85% of the Foundation's then investment assets be distributed to Soldier Charities and Youth Charities (Foundation Agreement Article THIRD, subparagraph A.1.d).

AA. Below are noteworthy provisions contained in the License which reflect the Donor's intentions in defining Petitioner's rights:

"Term. In setting the term of this License, I seek to: (i) provide the Foundation adequate time to produce a Completed Film (and thereby secure Perpetual Rights), and (ii) avoid a languishing of the Aegis Screenplay rights within the Foundation, with no legitimate prospect of producing a Completed Film. This instrument shall be construed in a manner consistent with this intent."

"Scope of License. In the creation of Perpetual Rights, it is my intention to narrowly construe such rights to be limited to the right to exhibit the Completed Film and receive of all revenues generated from such exhibitions, regardless of medium."

"Scope of Project. I view the considerable requirements set forth under Section 1.B. (needed to secure an Extended Term) as crucial to realize my vision that a Completed Film produced under this License must be worthy of viewing on a widespread basis long into the future."

"Exhibition; Fee Discounts. The Foundation shall use its best efforts to (a) undertake an exclusive extended theatrical release of the Completed Film (exhibited in theaters) immediately upon the film's completion, it being the Donor's firm belief that the Completed Film should be viewed by the citizenry in a communal setting; and (b) thereafter, facilitate viewing of the Completed Film to high schools in the United States for a discounted (or preferably no) fee."

AB The for-profit commercial film industry's failure to cinematically depict the American Revolution is longstanding. Since 2000, there have been zero theatrically released Revolutionary War-era films. During the same period there were fifteen American Civil War-era theatrical feature films and over four hundred World War II films (both theatrical and other). In the academic treatise The Cinematic Challenge: Filming Colonial America by John P. Harty, Jr. (2 vols., 2016, 2019) (hereinafter "Harty"), the author politely asked the following the rhetorical question:

"What significance can be placed on the fact that in 1976, as our nation prepared to celebrate its two hundredth anniversary of its birth, not one major, new theatrical motion picture about colonial America or the revolution was produced?"

* * * *

"[After a] search of the archives of major studios for films suitable for the bicentennial that could be reissued to theaters, sold to the TV networks or rented to markets such as schools and libraries [turned up nothing]";

AC Harty goes on to chronicle the United States government's action to remedy ”[t]his sad state of affairs", in order to "help restore our nation's spirituality as a sovereign state — it's national soul": in 1975, The National Park Service secured the services of legendary Hollywood director John Huston, and many of his long-time colleagues to produce a 30-minute docudrama, Independence.

AD Since 1973, only two such feature films have been released theatrically. The first was Revolution (1985), an account of fictional frontiersman Tom Dobbs (played by Al Pacino) and his foray into this war. Despite an Oscar-winning lead actor (Pacino: Godfather II) and producer (Irwin Winkler: Rocky), the film was a colossal disappointment, grossing less than $400,000 (against a budget of $28 million).

AE The Patriot (2000) was a box-office success, grossing $215 million on a budget of $110 million; however, like Revolution, this film was a work of historical fiction whose lead characters were not real people. Accordingly, both films are not properly comparable to the Aegis Film. Certainly, these films would not be held out as historically accurate films. And so, twenty-one years into the 21^st century¹⁸, and approximately fifty years since the last such film, the world still awaits its first historically accurate feature film in the 21^st century accurately depicting the American Revolution.

AF Tom Rothman, Head of Sony Pictures Motion Pictures Group, stated:

"I do believe, I think one of the great things about movies and, interestingly, one of the things that separates theatricality from some of the other mediums now, is the cultural impact that films make. They make cultural impact. And I know from my own self, I like it when we are making a positive cultural impact. I think that's a really great thing and one of the things that movies can still do and still do on a world-wide basis." (emphasis added). See cite at footnote 8. Referenced quote is at 29:00.

12. Petitioner requests that the United States Tax Court grant Petitioner's request for tax-exempt status as a private operating foundation pursuant to Code Section 501(c)(3).

Aegis for Dreams Foundation

By: Matthew W. Ryan, Trustee
159 Woodlawn Avenue
Saratoga Springs, New York 12866
Phone: 315-542-9100

Dated: November 8, 2021